Credit seems to be more available for commercial real estate. For example, I know of one commercial real estate lender working on a construction to permanent loan program. This type of lending blends two types of loans: a construction loan to build the project and a term loan to finance it once the project hits certain targets.
If implemented correctly, a lender literally will capture market share. And a borrower can save time and money by closing two loans at one time. However, it has unique due diligence and documentation provisions, which are different from a construction to perm loan covering a home.
In this post and in future posts, we’ll look at a few of these elements and provisions. Understanding these should help you as you jump into offering or accepting a construction to permanent loan. And, don’t forget to address or include the “lessons learned” over the past 4 years into the equation!
Some of the unique elements of a construction to perm loan:
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Survey requirements
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initial survey
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foundation survey during construction
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as-built survey as a conversion (and/or as a final advance condition)
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Title insurance requirements, such as:
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mechanics and material mans coverage
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pending disbursement or down dates on draws
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Casualty and liability insurance requirements
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builders risk coverage
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evidence of coverage by contractor(s)
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Credit enhancement covering construction risk, such as:
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Full liability of borrower until rental, loan to value and\or debt service coverage thresholds
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Guaranty of sponsor: full payment\performance v. completion; and then merely bad-boy events; (one issue: does completion guaranty include merely shell or also tenant improvements?) (another issue: what are the requirements or conditions to migrating the guaranty from a 100% of the loan and project to merely covering bad-boy events?)
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Letter of credit until rental, loan to value and\or debt service coverage thresholds (another issue: how to handle letters of credit from tenants?)
I’ll cover more in future posts.
